Reducing Federal Budget Deficits: Considerations

Abstract

It is generally recognized that, in the absence of policy changes, the U.S. faces a long-term fiscal challenge. But, as a result of the 2007-09 recession, the U.S. is currently facing an unemployment crisis — the unemployment has been above or near 8 percent since February 2009. Furthermore, economic growth has not been great enough to add enough jobs to keep up with the growth of the labor force. The short-term unemployment crisis and the long-term fiscal problems will require that Congress and the President to make difficult choices with regard to federal spending and revenues over the next several years. This chapter examines the U.S.’s long-term fiscal problem within the context of the current economic situation and explores issues that should be considered in addressing these problems. There have been a plethora of formal and informal panels that have examined the fiscal future and developed possible policy packages, often using CBO’s budget options report as a Chinese menu in choosing plan provisions. Given what the government does, it will be virtually impossible to solve the long-term fiscal problem through spending cuts alone. Additionally, using tax increases alone to solve the long-term fiscal problem is probably politically unpalatable. Therefore, some combination of the two will have to be used to bring deficits and debt under control. There is no lack of options that could be adopted to address the long-term fiscal problem. The major obstacles are political.

Keywords: Federal Budget, Deficits, Debt, Spending, Revenue

JEL Classification: E62, H10, H20, H50, H60